Education AFR article: Howard Marks on why market bulls are winning

Discussion in 'Share Investing Strategies, Theories & Education' started by oracle, 6th Aug, 2020.

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  1. oracle

    oracle Well-Known Member

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    Marks ponders on reasons why the market bulls are winning so far...

    Full article: here (behind paywall)

    @dunno would love to hear your views on why the bulls are winning and is it different this time?

    Cheers,
    Oracle.
     
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  2. MangoMadness

    MangoMadness Well-Known Member

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    Saw a clip today from Buffet basically saying 'interest rates are like gravity to valuations'.

    Not sure how long ago he said it but it rings true.
     
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  3. Snowball

    Snowball Well-Known Member

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    Does that mean we’re operating at zero gravity :D
     
  4. orangestreet

    orangestreet Well-Known Member

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    There was a podcast (Animal Spirits) in which the Wealth of Commonsense blogger Ben Carlson and Michael Batnik discussed what they called the "S&P 5". The overarching point discussed was how the dominance of Apple, Amazon, Microsoft, Google and Facebook is driving the market and for a bear market to return, you will need to take those 5 down. If not, the market will keep going where these 5 go.

    I could have got this wrong but Ben gave examples of Apple gaining over 10% since the beginning of the year and how for a 1.5 trillion dollar behemoth that is just insane. And if I recall correctly, they said that the entire US stock market was 38 trillion and the top 30 companies made up something like 30% of the 38 trillion.

    Totally agree with what seems indestructible today can fall by the way side easily. Again, from the podcast they were speaking about how Exxon Mobil had the biggest market cap in 2010 and now not in the top 15 even!
     
    Last edited: 7th Aug, 2020
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  5. Snowball

    Snowball Well-Known Member

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    I think a comment they made was that as Exxon is now a $180b company, when Apple popped 10% the other day it rose by the value of one Exxon in one day. For a company that was the biggest stock ten years ago, pretty crazy!
     
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  6. dunno

    dunno Well-Known Member

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    I dunno much, but I’m as happy as the next guy to make up a story to explain the world around me - nothing different in that, this time.

    I try to have a data driven perception of market value rather than emotion driven perception.

    The crashing share market fitted with the emotions of the pandemic and its near-term consequences to the economy. But the bigger data driven picture is less impacted by a year or two of earnings wipe out, so long as the assets remain solvent and continue to produce for the long term.

    I see Australian market for which I am satisfied with my valuation model at reasonable value given the current known's. And that is without using the historically low interest rates Howard is talking about as a discount rate. So, my sense of the market overall not being overvalued doesn't suggest to me that the Bulls are winning but nor are the Bears.

    One thing that is happening in the market is that companies with "assets in place" are attracting a much lower valuation than "story about the future" stocks. So, you have a bit of cheap and expensive averaging out. This stratification is not unusual, it comes and goes. It was maybe a bit surprising that the story stocks rebounded the best, I guess things haven’t run their course yet.

    Some of the story stocks may work out many won’t. CPU is a good example of a past story stock that survived and is now an “asset in place” stock. If you look at its price vs earnings chart below, the market priced the potential of the business not too badly but about a decade in advance. Even so it suffered about an 80% price drop in the dot com bust before recovering and flat lining until earnings eventually come through. There is many other dot.com companies that showed the same price explosion in the tech boom betting on a business future that didn’t materialise, and those stocks delisted without returning anything to shareholders.

    upload_2020-8-8_17-23-39.png

    That this sort of speculation is happening in the market often is not a bad thing – Its part of the markets role to allocate capital to speculative opportunities. Many will fail, a few will succeed spectacularly. For long periods of the time the price says nothing about the value or likelihood of survival of a company, the price discovery is mostly just people betting on prices without any true insights into the business. I’m quite happy to have exposure to this segment of the market at market weight, but I'm not interested in outsized bets very often. Valuing and riding businesses with established assets (including intangible) in place is easier for me. I also observe that is how most well-known long-term successful investors proceed. Sure there are many entrepreneurs that have made it big from a long shot, but they were insiders who were destined to fly or bust on the business outcome because they were all in for a multitude of reasons.

    On USA market values, because I do not have a robust valuation model, I defer to Aswath Damodaran for valuation feel.

    Here is a video from him in June where he looks a t overall market valuation and does not see it as too far from fair either. In addition to the valuation its worth watching to see how he goes about establishing a value on data rather than emotions.



    Overall. I don’t see the market as different at all, same old beast I’ve been looking at for the last 20 years. Just a heap of people coming together to discover pricing and trade assets in the face of some known's and more importantly lots of unknowns.
     
    Last edited: 8th Aug, 2020
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